INTRODUCTION:

With access to both onshore and offshore EFRBS providers, this site tells you everything you need to know about EFRBS in 2010 - and how they can be used to save considerable amounts of tax in 2010/11. We are available to work with IFAs and Accountants from around the UK; but our comprehensive guide to EFRBS contains everything you need. We are not an IFA or an Accountant, so will not have any conflicts of interest working with you.

If in doubt - try contacting us and asking for more information on how our EFRBS can be used in your business.

WHAT IS AN EFRBS?
EFRBS stands for "Employer Financed/Funded Retirement Benefit Schemes". EFRBS are HM Revenue & Customs (“HMRC”) approved statutory pension schemes; but unlike ‘traditional’ pension schemes there are no investment restrictions. They were introduced by HMRC from April 2006 ("A Day") - with each EFRBS being given a unique reference number by HMRC soon after it has been arranged.

An EFRBS is NOT an Employee Benefit Trust (EBT); and is not limited under the A Day Pension rules on maximum fund size, which is called the "Lifetime Allowance" - which for 2010/11 is £1.8m.

The purpose of the EFRBS is to provide retirement and death benefits for the executives, employees and their family. Although loans can be made to both the Employer company and/or employees.

LEARN MORE:

The following notes cover a wide range of uses for an EFRBS, but remember that everything you read should not be taken as investment or pensions advice. It is simply an overview of how EFRBS are used and some thoughts to discuss.

We are fully aware of the HMRC comments made in relation to EFRBS and Corporation Tax relief, and have access to a special type of deferred annuity that the Trustees can use where a Corporation Tax deduction is being explored.

WHO CAN HAVE AN EFRBS?
As the name suggests, an EFRBS is a company sponsored arrangement for the benefit of the Directors and Employees of the company. This of course includes the family of the employee as beneficiaries under the Trust. An EFRBs is available to both "trading" and actively managed "investment" companies.

SPECIAL NOTE:
Many clients who approach us with regards to an EFRBS end up using another type of Company Trust. The main questions to ask are:

• Is a corporation tax deduction required? If "yes" - then only an EFRBS will work.
• If there is no corporate tax deduction required (for retained profits where tax has already been paid), then we need to ask about the ownership and control of the company. If there are 5 or more shareholders with no one individual with overall control... then we can add the OTHER type of Corporate Trust to the conversation.

WHAT IS THE TAX POSITION OF AN EFRBS CONTRIBUTION?
Normally there is no Corporation Tax deduction on the contribution, but to counter this, the EFRBS contributions are not taxable as P11D benefits - so there is no income tax or National Insurance payable by the member on the contribution made.

However, it is potentially possible to secure a corporation tax deduction (without any corresponding income tax liability) as the contribution to the EFRBS could be deemed to be a “qualifying benefit”. This is because planning on offer takes advantage of legislation which was drafted to address tax avoidance issues. (Contact us for more information - please note that this tax relief is not being guaranteed by us, and depends on many factors outside of the scope of this web site). We are fully aware of the HMRC Spotlight notice and comment about Corporation Tax relief on contributions, and have access to a potential annuity based solution.

It is likely that HMRC will amend the legislation at some point in the future to correct this "error". Therefore, the opportunity available to implement this arrangement is expected to be limited. Whilst it cannot be discounted that any legislative change will be applied retrospectively, this seems unlikely. Of course, if no Corporation Tax deduction is applied for, or requested - then this is not an issue.

Where a portion of the profits of the company remain taxable (i.e the EFRBS covers 75% and 25% still remains), there is the opportunity to make use of one of the corporate investments which reduce the tax liability on profits not covered by this EFRBS Planning.

WHAT IS THE TAX POSITION OF AN EFRBS INVESTMENT?

Money within an EFRBS can be invested in a wide range of assets - as there are none of the normal "pensions" restrictions on the EFRBS. With this in mind it is normal for the Advisor to ask for details surrounding the possible range of planned investments; as this will determine the type of structure being recommended.

For example, if the company elects for offshore Trustees to run the EFRBS, then there will be no taxes raised on OFFSHORE income and gains - but the EFRBS will have taxes to pay on UK derived income (although the rate of tax will be restricted to the current BASIC rate of tax as there is no legislation to enable HMRC to tax the EFRBs at the usual higher rate of 40/50%).

Should the EFRBS wish to invest in a "trade" - this is best carried out through a company that is wholly owned by the EFRBS. There is a distinct advantage to this, as the "EFRBS Company" will not be linked to the "Employer Company" or any other company being run by the existing Directors of the sponsoring Employer. This allows profits up to the full £300,000 to be earned and taxed at the lower rate of Corporation Tax, rather than being "aggregated" with related companies, which may have access to (for example) a lower rate band of £150,000.

Another significant advantage to an EFRBS is where the Employer Company has cash and wishes to invest in an asset - where a capital gain is potentially going to arise in the future. Should the Company make the investment by itself there would be Corporation Tax to pay on the gain, plus the shareholder would potentially have to pay Capital Gains Tax on the uplift in the value of the company shares when they wind up or sell the company. An EFRBS is an ideal investment shelter for company funds, as gains can be made free from UK taxation. The proceeds of investments are also outside the company when putting a value on the shares; an ideal position when companies are being sold or wound up.

As an EFRBS is outside of the estate for IHT purposes, this is yet another advantage for the EFRBS being used - especially where significant investment returns are expected to be made.

WHAT CAN AN EFRBS INVEST IN?
An EFRBS can invest in stocks, shares, loans (even to Members and their family), commercial property, residential property and a whole host of other things. It is not restricted by the pensions investment rules associated with formally approved pension schemes.

It can even invest in a loan to the Employer Company - subject to this being specifically for the purpose of the trade and on full commercial terms. (Currently the HMRC approved interest rate is 4.75%)

EFRBS are permitted to invest in cash deposits, fixed interest investments, equities, derivatives, unit trusts and investment trusts and, of particular interest, residential property. EFRBS can lend money, borrow money, invest in unquoted companies and effect transactions with connected parties (such as the Trustees or scheme members, as long as these transactions are on a commercial basis).

EFRBS TO "RING FENCE" ASSETS:

Unlike civil servants and most politicians, one feature of being in business, being an entrepreneur, is that you live in the harsh real world. The difference between success and failure, financially, is a knife edge, and can depend not just on your hard work but also the infallibility of your judgment and very often on factors entirely outside your control, like changes in the market or major bad debts.

So, for many people, the answer to the question: ‘Why don’t you just leave the money in the company?’ is ‘Because the company may not definitely be there when the time comes for your retirement.’

It’s important, for many people essential, to ring-fence money and assets in a separate fund so that, generally speaking, they are not vulnerable to downturns in the company’s or limited-liability partnership’s business. The whole point of limited liability, which these two types of entity give you, is that assets held outside the trading vehicle should be safe.

Although an EFRBS contribution may not be used to claim a Corporation Tax deduction, it is a genuine contribution and should be pretty unassailable in the event of a future unforeseen insolvency of the company.

EFRBS vs DIVIDENDS:
As well as not giving rise to any personal tax charge, a contribution to an EFRBS can be a better idea than paying dividends. A dividend tends to be more attackable in the event of corporate insolvency, because it is almost by definition a payment for which there is no valuable consideration given back to the company. Also unlike dividends, an EFRBS contribution need not be made by reference to the shareholdings in the company. So if you have a significant non-working shareholder whom you don’t want to get mixed up in payments that are really in the nature of remuneration for services, then an EFRBS contribution can come out of the company out of all proportion to the shareholding held by the EFRBS beneficiary.

Many company Directors will pay themselves a small salary (upto the National Insurance lower limit) - then take a dividend to cover the basic rate band. After that (which results in nearly £40,000 being paid out free from personal taxation), the best alternative could well be the EFRBS - as it does not trigger any personal tax.

EXAMPLES OF HOW AN EFRBS CAN BE USED:

ACCESS to PROFITS:
With Salary or Bonus the company and the individual suffer a range of taxes. There is the income tax at the highest rate for the individual (40% CURRENTLY, 50% planned - but who knows in the future!). Add to this the 1% National Insurance paid by the Employee for income above the Upper Earnings Limit (we are ignoring the NIC payable at lower levels) and a further 12.8% by the Employer and you get a massive total of 53.8% of their profits lost in taxes- rising to as much as 63.8% next year and more beyond then.

Even taking a Dividend results in nearly 39% being lost in taxes (more if profits exceed £300,000).

With the EFRBS, there is no exposure to Income Tax or National Insurance for either the Employee or the Employer. The costs are simply the fees - which are only 6% plus the Trust set-up of £7,500. (Tax Advice fee if applicable is only £2,500 plus VAT)

ASSOCIATED COMPANIES:
As you know, where a number of companies have common Directors they are deemed to be "connected" (more detail on this is available if required). What this means in practical terms is that the £300,000 lower threshold for Corporation Tax is shared between the companies.

So, if there were 2 connected companies - each with £300,000 of taxable profits the calculations would be as follows:

Company 1:
£150,000 taxed at 21% = £31,500 plus
£150,000 taxed at 32.75% = £49,125
Total Tax = £80,625

Company 2:
£150,000 taxed at 21% = £31,500 plus
£150,000 taxed at 32.75% = £49,125

Total Tax = £80,625

Total "Joint" tax = £161,250

If the second company were to be owned by the EFRBS, then they would NOT be connected. Each company would have the FULL £300,000 tax band and the tax calculations would be:

Company 1:
£300,000 taxed at 21% = £63,000

Company 2:
£300,000 taxed at 21% = £63,000

Total Tax = £126,000 - a saving of £35,250p.a

OFFSHORE INCOME/GAINS:
If the Client is looking at future investments that are offshore (i.e outside the UK), there are advantages to having these investments owned by the EFRBS or a company which itself is owned by the EFRBS.

As an offshore EFRBS there will be no capital gains tax on all offshore gains, and there will be no corporate or income taxes to pay on offshore derived income.

NOTE:
Income arising in the UK will be taxed in the hands of the Trustees - either directly, or as part of the accounting for a company owned by the Trustees. Ideally the company would be best as the tax paid on UK derived income would be the same as the UK Basic Rate of Income Tax.

Another benefit is that a company owned by the EFRBS could be classed as an "investment" company… which, if set up by the Client in the UK, would be part of their Estate for IHT Purposes. In this case, it is simply one of the investments owned by the EFRBS and could therefore be outside their estate and not taxed at 40% on death (as long as correctly setup).

REPLACING MORTGAGES WITH LOANS FROM THE EFRBS:
Let us look at a mortgage of £100,000 at 5.5% interest (as a simple example). The Director would possibly have monthly costs of £780 to pay interest and capital repayment).

In order to have this in their pocket, the company would have had to earn in excess of £1,478 as gross profit. The rest goes in both Income Tax and National Insurance costs.

With a loan from our EFRBS - we have a special arrangement that costs the borrower as little as 0.75%p.a and there is no benefit-in-kind tax charge or taxation within the Trust. If we assume 0.75%p.a interest and no capital repayment the figures are:

£100,000 x 0.75% = £62.50 per month - which is easy to cover in terms of gross profit needed to meet the costs.

REPAYING LOANS:
Some clients will be looking at ways in which to reduce these costs. One option is to swap the loan for shares in the Employer Company. (Subject to valuations and Trustee agreement). This reduces tax exposure down to 10% on funds passed from the company to the Director.

This will further reduce the costs to the Directors and even shelter future capital gains on shares that are now held by the EFRBS. An ideal position should the Director have a view on long term exit giving rise to extra gains. Loans that are outstanding on death are debts against the estate and valid for IHT purposes.

EFRBS INVESTMENTS Vs PERSONAL INVESTMENTS:
If a company had £100,000 of profits to be used for investments - the normal route might be to pay a dividend to the Director, and then let them undertake the investment in their own name. Immediately the £100,000 suffers a loss in both Corporation and Income Taxes - leaving only £61,225 to be invested.

This figure is reached by assuming that the £100,000 pays 21% Corporation Tax - the loss may be even higher if the company had profits in excess of £300,000. However, this example leaves money of £79,000 for a dividend to be paid to a 40% taxpayer - who then suffers a further 22.5% tax of £17,775. Total tax = 38.775%.

If the investment is in the hands of the individual, there will be income tax to pay on any interest earned, and potentially capital gains tax to pay on gains (if applicable).

Even a good growth rate of 6.5% would be netted down to 3.9% if a high rate taxpayer holds the investment.

It would take 13 YEARS for the £61,225 to grow BACK into the £100,000 starting point.

If the investment were to be made within the EFRBS the investment can be allowed to roll-up without tax (if this is an offshore investment).

Even if we take off the setup fees of £7,500 and ignore the £21,000 of Corporation Tax Relief (which MAY be possible), the starting fund is £71,500.

Growing £71,500 over the same 13 years at a gross return rate of 6.5% = £162,125 or nearly 62% MORE money in the investment than if held in person.

We have not even mentioned the IHT position or the impact of the extra £21,000 of corporation tax relief (should it apply).

LIFETIME LIMIT PLANNING:
It is sometimes hard for a Pensions Advisor to decide on which route to go down - do they advise on a normal "Approved" pension... or do they select an "unapproved" pension (such as an EFRBS). Well, one thing to consider is the Lifetime Limit that applies to approved pensions.

If someone were to invest £600,000 at a growth rate of 5%p.a for 22 years, they would exceed the current Lifetime Limit of £1.8m by the time they reached 75. Depending on age, fund size and growth you can easily see future problems for investors as their funds begin to exceed the Lifetime Limit.

Set out below is a table with some examples to show how this "limit" can hit people planning for retirement in the future:

As an EFRBS is not included in the Lifetime Limit, it can be a very useful tool to use when considering retirement planning.

From The Times November 26, 2008:
Freeze on pensions lifetime limit to hit savers by Ian King.
Alistair Darling was told last night that his decision to freeze lifetime pensions allowances could have severe consequences for thousands of savers. Mr Darling said that the pension lifetime allowance from 2010 to 2015-16 would be frozen at £1.8 million. Anything over that amount would be taxed at a rate of 55 per cent.

RESIDENTIAL PROPERTY:
An EFRBS is allowed to invest in residential property (something that a pension cannot). To make things even better, the EFRBS can setup a property company and hold the property in that. With the residential market giving rise to a number of great deals, such as property at very low values, there is the possibility for future gains to consider too.

An EFRBS would help by reducing the tax on rental income to the BASIC rate AND shelter future capital gains from Capital Gains Tax.

EDUCATION & CARE HOME COSTS:
Parents funding University fees and/or helping repay Student Loans can use EFRBS to save tax on having to take bonuses or dividends and direct these savings directly into loans to cover school fees, university fees and long term care for elderly parents. It is rather like having these costs covered by the Government after all… and brings a smile to many a Director's face.

TAKING BENEFITS:

When a company first establishes an EFRBS, the money is held with a "GENERAL" fund - for the benefit of all employees. At some point in the process an individual Member may be granted "benefits". This can take the form of:

a) Funds simply "earmarked" within the fund as belonging to the individual.
b) Funds physically moved from the "General" fund into an EFRBS Trust specifically for the benefit of a named individual and their family.
c) Income paid to them by the EFRBS - which would be taxable in the hands of the individual so is not normally advised.
d) The Trustees can buy an Annuity for the benefit of the Member. Normally an "Annuity" means that the capital is lost to an insurance company in exchange for the taxable income - but in our case we have a special form of "Annuity", where taking income is flexible (i.e can be deferred) AND the funds are not lost on death. Please ask for more information.

Which option is selected will be down to the individual and their circumstances and should not be taken as determined at outset.

WHAT ARE THE COSTS?
The costs depend upon how the EFRBS funds are allocated, but in simple terms they are:

a) £7,500 to establish the EFRBS.
b) £2,500 (or more if they select an alternative CTA) for a Chartered Tax Advisor (CTA) to give formal tax advice on the planning.

c) Setup fee of no more than £750 for any sub-trusts.

c) £2,400 annual trustees fee (pro-rated in Yr 1 depending on when setting it up, plus this will be reduced to no more than £250 if the funds left in the EFRBS falls below £100)

d) £2,400 annual trustees fee for each sub-trust used to distribute funds to named individuals.

e) 6% Contribution fee (if a Corporation Tax deduction is applied for) and a 3% fee if not applied for.